Monday, 8 November 2010

Book Review: Behavioural Technical Analysis by Paul Azzopardi

This book is a rationalist's attempt to make sense and investing use, through technical analysis, of the often irrational behaviour documented in the field of behavioural finance. Two-thirds of this book is brilliant and the other third is disappointing.

The brilliant part: Azzopardi provides the best explanation and summary of behavioural finance concepts that I have come across to date. Not only does he explain simply and clearly with entertaining examples each individual idea like framing, representativeness, anchoring etc, he classifies and organizes it all and turns a bunch of seemingly random and contradictory ideas into a cohesive, sensible structured whole. His two groupings – the first is Complexity, Perception and Aversion and the second is Self, Society and Gender – really succeed in fitting together the disparate concepts. I found this material to be very helpful in reflecting on my own money and investing actions, to figure out what I'm doing wrong and right, which will allow me to make improvements.

In this regard, the book is a better and more satisfying read than more famous books in the behavioural finance pop charts like Dan Ariely's Predictably Irrational, Jason Zweig's Your Money and Your Brain and Terry Burnham's Mean Markets and Lizard Brains (my review here).

The disappointing part: The case for being able to successfully apply the undoubted truths of behavioural finance and the assumed efficacy of technical analysis isn't convincing. While there is no doubt that emotions and faulty thinking affect stock markets, the problem is the difference between ex post prediction and ex ante explanation. After the fact, everything is clear and periods when the crowd of investors has been irrational can be pinned down, as Azzopardi does do, to the stock price charts and technical indicators. But how do we know today what optimistic or pessimistic behavioural finance impulse is driving the market? As he writes on page 158, “It is always hard to tell what the reaction will be and the market often reacts to the same kind of news in a different manner.

A surprise for me in this book was to find a reference to a research paper by William Brock, Josef Lakonishok and Blake LeBaron that supports a conclusion that at least some technical analysis trading rules – all of which are entirely mechanical and have no behavioural finance shaping - were successful in generating true excess trading profit. I looked the paper up and indeed their research does state the technical analysis methods tested (moving average and trading range break) did “... provide strong support for the technical strategies”. It will be interesting to look into this stuff for a future blog post!

Another feature I like is the fact that the book provides the detailed reference to this paper and many other research papers and books cited in the book. Its website at also has online links, within a password-protected area (the password is in the book), to the actual documents.

Rating: This book is worth buying for the excellent first part alone but my rating for it suffers due to the second part – (5/5 x 2/3) + (2/5 x 1/3) = 3.5 out of 5 total.

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